The Retail Distribution Review (RDR) is expected to be one of the biggest shake-ups to hit the financial advice industry. While it is aimed at improving the quality of investment advice given to consumers, and improving consumers’ understanding of the advice, in reality it will likely squeeze unprepared financial advisors out of the market and potentially burden consumers with extra fees.
Major finance and insurance companies will need to adapt their current business models to comply with the coming legislation.
Current practices where financial advice is heavily tied into commission based product sales has meant that financial advisors are selling products that suit their needs rather than tailoring products to consumer’s life needs. As the
legislation is adopted in the coming months, commission based products will no longer exist. Instead commission is anticipated to be replaced by a model that sees consumers paying to receive tailored, individual financial advice.
The biggest challenges facing the industry is how to adapt current practices to comply with the new requirements. The key issue is whether South African banks and insurance business are ready and able to evolve. Recent findings by CoreData Research South Africa showed that less than half of South African financial advisors are prepared for changes that are likely to come from the RDR.
Of those surveyed, only 12.8% currently work on a fee-based model that would require no adjustment post-RDR. Financial advisors though that are adapting their business models to create added value to their clients are most likely to evolve through this time of change. Another key issue though centres around whether consumers will be willing to pay for advice in the current form.
Peter Gerson, business development manager, Yellowtail Business Solutions says: “RDR has already had a significant impact on Europe where on one hand we see major insurance businesses adopting technologies to analyse and better understand their consumer’s needs in relation to mortgages, life insurance and retirement plans.
“But on the other hand, those businesses that failed to adopt more consumer centric models resulted in a large reduction in the number of financial advisors. According to CoreData UK, the number of UK advisors dwindled down from 35 000 in 2010 to around 20 000 following RDR. This should be a stark reminder to the South African industry to prepare for RDR.
“Consumers are increasingly finance and tech savvy and are determined to have more control of their pensions and investments. At Yellowtail we see an increasing demand for software solutions that enable consumers to interact with banks and insurance companies to assess their needs and plan for their future. This need is being driven by both the impact of RDR legislation as well as the ever evolving consumer.
“There is no denying that RDR will have a significant impact on the financial services industry in South Africa. But industry players who adopt a consumer-centric approach and use technology to provide accurate, timely and tailored financial advice to their customers are the businesses that will be best placed survive this challenging time,” Gerson concludes.